Do You Really Need a Loan? 5 Questions to Ask Yourself Before You Make a Mistake

With the cost of living crisis putting a squeeze on many households’ finances, you might consider easing the pressure by accessing a quick loan.

Regulated short-term loans can be a valid credit option for squeezed households during the cost of living crisis. However, there have been concerns among regulators about the relatively small number of lenders left in the market for borrowers who fail the criteria for mainstream banks or need access to money more quickly.  

If you are thinking about accessing a quick loan during the cost of living crisis, these are the questions you should ask before you commit. 

Question 1: Will I qualify for a quick loan?

The last thing you want is to apply for a short-term loan only to be rejected, as the lender will make a hard inquiry on your credit file which will likely impact your credit score. Generally speaking, online loans are relatively easy to apply for. However, you should be wary of loan providers that are over-eager to lend to you and don’t carry out basic affordability checks or look at your credit history. Without this essential review process, the risk of you qualifying for a loan that you’re unable to repay is far greater. Online lender Wonga has published a free guide to the quick loan market which includes a very handy section on how to improve your chances of qualifying and the types of checks these lenders will make on your credit account.

Question 2: Will a quick loan affect my credit score?

The last thing you want is for a quick loan you access now to potentially reduce your ability to access credit or increase the cost of the finance products you use in the future. Importantly, applying for any form of online loan will affect your credit score to some extent. The size of the impact will be determined by factors such as how many loan applications you make and your previous repayment history.  

As a general rule, however, if you make a single application for a quick loan and have repaid previous loans on time, the effect on your credit score will be negligible. 

Question 3: Can you afford to pay it back? 

Making sure the loan is affordable is the most important part of the application process. As well as the loan amount, the best providers will give you the flexibility to determine your own repayment window. 

A longer repayment window – say three months – reduces the cost of your monthly repayments but increases the total cost of the loan overall. A shorter repayment window – one month is typical – reduces the cost of the loan but increases the risk that you will not be able to make the repayment on time. 

Therefore, spreading the payment over a longer period can help you borrow in a more affordable way and reduce the risk of incurring late fees. 

Question 4: Have you shopped around?  

The last thing you should do when searching for a loan is to punch ‘quick loans’ into Google and go with the first provider you come across. The interest rates and repayment periods can vary dramatically from one provider to the next. That’s why you should always take the time to shop around to make sure you’re getting the best deal. 

Question 5: Have you considered the alternatives?

It’s often the case that there are cheaper alternatives to short-term loans out there that you may not have explored. Bank overdrafts are one option, particularly if you have access to a free overdraft up to a certain limit. If not, a loan from a friend or family member could be worth exploring. It can be embarrassing to ask, but if it’s a one-off loan that you repay quickly then it shouldn’t become a problem. Alternatively, if you have savings or an emergency fund, now could be the time to use it. Effectively, you’ll be borrowing the money from yourself, at zero interest, and you can pay the money back into your savings as soon as you have it.